Spain, and more concretely our geographic area (Levante), it’s a quite attractive place for foreigner investors, especially due to the quality of life it offers to residents and visitors.
Nevertheless, it is necessary to be aware of applicable legislation and possible risks that may arise with respect to the Tax residence implications.
Any foreigner who spends his time in Spain, whatever the reason is, in several circumstances could be considered as Tax resident in Spain, even if he is not aware of it, feeling that he is just here for long holidays, for business or for health issues. This consideration, however, can imply relevant consequences from a Tax point of view.
According to Spanish domestic Law, an individual is considered as a Spanish resident as long as any of these facts occur:
– Staying more than 183 days, during the natural year, in Spanish territory.
– Being Spain, directly or indirectly, the place in which the main business interests or activities are based.
If the spouse or children are living habitually in Spain, this would be a presumption that the individual has his permanent residence in Spain.
Sometimes the individual can be also considered as a Tax resident in his original Country. In this case a conflict may arise, and it’s necessary to apply Double Tax Treaties signed between two Countries to solve it.
According to OECD Model of Tax Treaty, if both Countries consider an individual as resident, the situation should be solved by applying the following criteria, in the alternative:
– Individual will be resident where he has a permanent home available to him. If the has this in both states, then he shall be deemed to be a resident where his personal and economic relations are closer (centre of vital interests)
– If the centre of vital interests can not be determined, or if he has not a permanent home available to him in either State, he shall be deemed to be resident only in the State in which he has an habitual abode.
– If he has an habitual abode in both States or in neither of them, he shall be deemed to be a resident only n the State of which he is a national.
– If he is national os both States or neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement.
Spanish Authorities require a valid Tax Certificate issued by the other Country in order to prove the Tax residence in a different Country than in Spain. Nevertheless, this is necessary but may not be enough to prove the fulfilling of all the requirements previously described.
In case of having a permanent home available in two Countries, it’s especially delicate to determine the centre of vital interests, as it is a very casuistic criterion. For that reason is necessary to analyse each case individually, taking into account all the circumstances together, trying to not to arrive to a wrong conclusion.
Comentaries to OECD Model of Covention, establish, in this respect, the following:
“If the individual has a permanent home in both Contracting States, it is necessary to look at the facts in order to ascertain with which of the two States his personal and economic relations are closer. Thus, regard will be had to this family and social relations, his occupations, his political, cultural or other activities, his place of business, the place from which he administers his property, etc.
The circumstances must be examined as a whole, but it is nevertheless obvious that considerations based on the personal acts of the individual must receive special attention. If a person who has a home in one state sets up a second in the other State while retaining the first, the fact that he retains the first in the environment where he has always lived, where he has worked, and where he has his family and possessions, can together with other elements, go to demonstrate that he has retained centre of vital interests in the first State.”
Consequently, “centre of vital interests” definition is not clear, and it has been analysed by Judicial Court and Tax Administration, and at the end there are two main links to determine where it is: familiar and economic having preference the first before the second.
Main tax obligations the may face an individual who is liable to be Spanish Tax resident are the following:
• Fulfilling and paying of Personal Income Tax.
• If so, fulfilling and paying of Wealth Tax
• If so, fulfilling of the Informative declaration of Assets and rights located outside Spain (720 Form).
• In some cases Inheritance Tax can be affected.
As a conclusion, it is necessary to deal each situation particularly in order to determine Tax implications related to the place of residence. This is quite important to avoid innecesary and unwanted consequences.